There are some structural problems that contribute to (but don't cause) this phenomenon. By most university rules an engineering student needs to do an 'external project' with a company or research lab to complete his degree.

Technically you can do a project of your own but most professors of engineering in India are clueless about real world engineering projects and don't do any research or have projects of their own. Most students are not pigheaded enough to buck the system by formulating their own projects and risking failure. (note: I said 'most', IIT s etc are different. Here one is talking about the equivalent of a school in Hicksville in the middle of nowhere and totally disconnected from industry).

There are tens of thousands of students needing such an internship/project in a given city every year. Most schools just wash their hands off the whole deal and ask their students to 'go get a project done' with no additional guidance. Most professors, with class sizes of 30 - 50, don't care about formulating or supervising projects.

How is a 19 year old supposed to get a non existent company to give them an internship on a sharply defined project?

In CS it is often possible to get some kind of project thanks to all the software companies in India, but in other fields like mechanical or electrical engineering, there simple are no projects available. These 'project providers' step into the void and provide 'internships' which exist only on paper and provide a complete project report to the student, who pays substantial (in local currency) fees, submits the report to his clueless profs and ticks off his 'project complete' checkbox.

Now, added to this structural problem is the fact that most engineering schools in India approach the teaching of engineering as 'book learning'. Students memorize formulae and regurgitate them in exams without the faintest clue of how to actually build anything (hence the 'can't build a circuit' description in the OP). Just to complicate things, students have no training in technical writing, and even assuming they have a thesis, and know how to do confirming experiments and so on they still have trouble writing a hundred pages in English.

None of this is to excuse any of the participants in this farce. This needs to be exposed, and corrected. Just identifying some underlying factors. If the professors decided to clamp down on such fraud, there is no way this will continue. But most are happy to play along.

An offshoot of this is the business of creating personal essays for admissions to US schools. Professors in the US, if you see a hundred admission letters starting with "Two Roads diverged in a wood " ( I am NOT joking. I've seen 'professionally prepared' essays that start this way,) you know your prospective student has outsourced his personal essay.

Some of these outsourcers get admitted to US universities, or get good jobs and so their path gets validated for younger generations as the 'smart thing to do'.

And so the dance continues.

somewhat tangential, personal 'external project' anecdote from a long time ago

I studied Industrial Engineering in a decent but not great school and my profs were well meaning but not particularly clueful. They saw Industrial Engineering as an offshoot of Mechanical Engineering and shot down all my proposed 'build a compiler' type projects (I wanted to do a software project), because 'That is computer Science, not Mechanical or Industrial Engineering. You have to do a project in Mechanical Engineering'.

So I compromised by forming a team with a couple of sharp guys, writing a small but sophisticated (given the circumstances) CAD program in Turbo C on a 486 PC ( hey it even had a scripting component - I did get to write a compiler after all), printed out all the code, added an introductory page and that was my 'project report'.

The profs were a bit taken aback at the hundreds of pages of C code (which they couldn't read or grok) but the software worked, I could answer all their questions, and CAD was "mechanical engineering" so I got top grades for the project. [1]

I later heard from some of my juniors that the profs used to tell them about this 'very talented bunch of guys who did a great project and you should emulate them' but I don't think anyone took that advice ;).

[1]That was the only 'course' for which I had anything like a top grade. I was bored to tears and rarely attended class and spent all my time chasing girls and scraped by in some of the "write down from memory the formula for stress in a cantilever beam" type examinations by deriving enough stuff from scratch to get a passing grade. Most classes (and exams) I completely ignored.

I completed my degree only because my employer(Cybercash, now defunct, but was one of the pioneers in payment processing, HQ in Virginia, with the devs in Bangalore) begged me to, so I could get a visa to go to the USA, and you couldn't get a visa without a degree. I wrote 22 exams in two weeks and got my degree. To this day I don't know anything about Mechanical Engineering.

PS: In retrospect I should have just (minimally) played the game of dutifully attending classes and so on and spend half an hour or so every day memorizing the facts and formulae required to get good grades. Would have saved a lot of stress.

Instead I rebelled against the insanity and quit attending class except to meet my friends. As pg said in one of his essays, (paraphrasing) when you rebel, you are still playing someone else's game,only with a logical 'not' added to the rules. You are still dancing to someone else's tune.

I don't have any regrets, but then I was thoroughly confused by the way engineering was taught and learned and what behavior was lauded and what was punished.

This was before the internet arrived in India. Now Coursera etc offer me a veritable cornucopia of insanely great teachers, Amazon has all the books and I am as happy as a pig in a mud pit learning new stuff well after my hair turned grey.